Wednesday, March 27, 2013

Government made huge mistake on Cyprus crisis

Two
weeks ago the European Council met. The meeting focused on the “European
Semester” and the economic priorities for the EU in 2013. It is clear, both
from the economic priorities emanating from the Council and its approach to the
Cyprus crisis, that the EU is wedded to the failed policies of austerity. There
is nowhere the dynamism and determination needed to tackle the jobs crisis
across the EU.

However
it is the events in Cyprus that have dominated political and public attention in
the period since that meeting.

This
morning in the Dáil there was an opportunity for party leaders to speak on the
Council meeting but most speakers concentrated Cyprus. It is there that we see
the real dysfunction at the heart of the EU approach to the economic crisis.

The
fact that the Euro Group, including Minister Noonan, would sign up to a bailout
which contained a levy on bank depositors under and over €100k, while sparing
Senior Bondholders in the banks, quite frankly beggars belief. That was a huge
mistake by the Irish government.

In
his statement this morning the Taoiseach admitted that the issue was not
discussed in detail at the summit, yet the government welcomed and signed up to
EU/ECB/IMF proposed bailout and levy, and European leaders then stood back over
the last week and allowed Cyprus to be brought to the brink of economic
collapse.

Instead
of assisting the people of the island, they have bullied it and accused the
Cypriot people of being the authors of their own demise. So, much for European
solidarity.

We don’t see such allegations being hurled
at larger European states when they get themselves in difficulty.

The revised bailout agreement means that
senior bondholders will now take a hit as will deposit holders over €100,000.

While I welcome the decision not to hit deposit
holders under €100,000 the reality is that the Rubicon has been crossed. International
depositors looking at the mess in Cyprus may consider not just withdrawing
their money from banks there, but from across the EU.

It is claimed that there are several large multinationals
who reportedly withdraw their money from Eurozone banks every Friday in case
something happens over the weekend – and that was before this latest crisis. So,
the prevailing sense is of a European establishment making it up as it goes
along.

The decision to try and hit depositors under
€100,000 puts into sharp focus ECB President Mario Draghi’s statement last July
that the bank will do whatever it takes to preserve the Euro.

This appears to now include hitting
depositors and possibly those with under €100,000 in a bank. The government
welcomed this. That was a mistake. The Cypriot Parliament rejected it but the
damage was done by then.

Why should investors, especially large
investors, trust the EU or ECB? Fears that bank accounts could be raided in
future bailouts were given added weight by the head of the Eurozone Finance
Ministers who at first suggested that the Cyprus bailout could be a template
for future action and then he had to retract this.

The ECB put Cyprus under huge pressure to
agree a plan by threatening to collapse its banking system. The bailout package
that has now been agreed includes the increase in their corporation tax from
10% to 12.5%.

This is a sovereign state having a new tax
rate imposed on it. The government claims that the EU cannot make us increase
our corporation tax rate – yet the government was part of the group forcing
this on Cyprus.

At the beginning of the Irish banking crisis
Sinn Féin called for bondholders to be burned.

Fianna
Fáil, Fine Gael and Labour told us it would never happen. They derided our
approach and claimed that the EU would never let it happen, and that banks had
to be bailed out at any cost.

The
EU has now signed off on the burning of senior bondholders in Cypriot banks.

Last
June, the Government also told us that a seismic game changer had been reached
in Europe, which would see the separation of banking debt from sovereign debt. The
Taoiseach told us that in future bank crises, the ESM would directly
recapitalize banks and the sovereign would not be expected to take on a bank
bailout.

He
told us that because we had taken on this liability, we would be
retrospectively recapitalized.

The
EU could have committed to using the ESM to cover losses needed for the Cypriot
Banks. They didn’t do this. And there is now uncertainty over the commitment to
separate sovereign debt from Bank debt.

Comments
over today and yesterday by some politicians cast doubt over whether the ESM
will ever be used to recapitalise banks whether retrospectively or not. Yesterday
the European Commission confirmed that it hopes the ESM fund will not be used
for directly recapitalising banks.

This
seems to confirm comments by the chief of the euro zone finance ministers
Jeroen Dijsselbloem, who questioned whether the ESM bailout fund will ever be
used to rescue banks directly.

There
seems to be a complete U-turn in EU policy in relation to the use of the ESM
and the burning of senior bondholders.

And
this is a u-turn which causes real problems for citizens of this state which had
this debt foisted on us by Fianna Fáil. We now have a legacy bank debt which
may never be dealt with.

So, the government has serious questions to
answer. What is the point of the ESM and where does Europe now stand on banking
solidarity?

What is the Irish Governments attitude
towards the burning of depositors in Irish/European banks and why did the
Government support it in the Cypriot case?

And will the citizens of this state ever
receive debt assistance for the debt this Government and the previous
Government put on the shoulders of the taxpayers to bail out banks with
taxpayers’ money?

Finally and prior to the European Council meeting the Taoiseach agreed
to raise the Jerusalem report that had been just been made public and which was
written by EU diplomats in the Middle East.

The report raised serious concerns about the actions of the Israeli
government in building settlements and excluding Palestinians for their land.

The Taoiseach made no mention of that in his statement this morning or
subsequently. So, I don’t know whether he did or didn’t raise the report as
promised. It is amatter I intend to
return to.